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Bulking Up on Bankers for Hong Kong I.P.O.’s

By Neil Gough May 6, 2013 1:30 pmMay 6, 2013 1:30 pm

Bobby Yip/ReutersTop officers of Sinopec Engineering at an investor presentation on Monday for the firm’s initial public offering in Hong Kong.

HONG KONG — After a lackluster 2012 and slow start this year, Hong Kong’s financiers are hoping to revive interest in initial public offerings. To test investor appetite, many companies are hiring armies of investment bankers in their efforts to market new shares.

In the three years through the end of 2011, Hong Kong had ranked as the world’s biggest I.P.O. market by the amount of money raised. Yet so far this year, new share sales have declined 14.3 percent, to $1.12 billion, from the same period a year earlier, according to Thomson Reuters data. Companies seem to believe that the answer to turn fortunes around is to employ large numbers of stock underwriters.

On Monday, the China Galaxy Securities Company, a midsize state-owned brokerage firm that is aiming to raise about $1.4 billion in its Hong Kong offering, hired 21 banks to help execute its deal. Those included big Wall Street firms like JPMorgan Chase and Goldman Sachs as well as the small Hong Kong brokerage units of mainland Chinese banks, according to a person with direct knowledge of the offering.

Sinopec Engineering, a spinoff from China Petrochemical, also started to promote an offering on Monday. It has 13 banks working on its deal, which seeks to raise as much as 17.4 billion Hong Kong dollars, or $2.24 billion.

The number of listed underwriters stands in contrast to big offerings in the United States. For instance, Facebook’s $16 billion listing, the biggest I.P.O. of 2012, involved 11 investment banks to help get the deal done.

Chinese companies appear to be making such moves as a way to price their deals as high as possible despite the risk that doing so could lead the shares to slump once trading begins.

“You’ve got a lousy market, and companies who don’t want to leave anything to chance to get their deals done, because they’ve seen so many deals go sideways,” said one capital markets lawyer in Hong Kong who declined to be identified, citing his relationships with banks. “The mentality is, why not just keep adding banks? It gives them more comfort.”

Just a few years ago, only a handful of banks were involved in large deals. From 2003 to 2009, a period defined by blockbuster Chinese privatizations, Hong Kong I.P.O.’s worth $1 billion or more usually involved two to four banks acting as underwriters, according to figures from Dealogic. That rose to an average of five to six banks on such deals in 2010 and 2011.

Last year, the figure soared to an average of 14 banks a deal — including the $3.6 billion offering in November by the People’s Insurance Company of China, which had 17 banks working on it.

Investment banks, however, worry that the trend toward more firms is making the market less profitable for new listings. Having so many competitors involved in a deal decreases everyone’s share of a fee pool that is fixed, sometimes to the point that helping sell an I.P.O. is no longer profitable.

“It’s not a very sophisticated way of doing things, and it ties up the whole street,” said one person with direct knowledge of the Galaxy offering, who spoke on the condition of anonymity because the details were not public. “As an industry, we should probably boycott these kind of deals, but when you’re talking about big, state-related Chinese issuers, it’s going to take a brave man to say no.”

China Galaxy Securities, for instance, is selling 1.57 billion shares at 4.99 Hong Kong dollars to 6.77 Hong Kong dollars apiece, according to a term sheet. The joint global coordinators of the deal are JPMorgan, Goldman Sachs, China Galaxy International, ABCI Securities and Nomura, with 16 other banks acting as underwriters. Representatives of the company could not be reached for comment. The deal is expected to price on May 15 and begin trading on May 22.

Sinopec Engineering is aiming to sell 1.328 billion shares at a price of 9.80 Hong Kong dollars to 13.10 Hong Kong dollars apiece, a separate term sheet showed. JPMorgan, Citic Securities, UBS and Goldman Sachs are joint global coordinators of the I.P.O., and an additional nine banks are acting as underwriters. It is scheduled to price on May 16 and begin trading on May 23.

The trend toward adding underwriters can lead to a host of problems, both for the banks that bring deals to market and for the people who invest in the regular part of the offerings.

Chinese companies are also relying increasingly on so-called cornerstone investors, who commit to buy a large part of an I.P.O. in advance. In Hong Kong, such investors agree to hold shares for a fixed period, usually six months. But sometimes more than half the total offering is being set aside for cornerstone investors, decreasing the liquidity, or the volume of shares available for trading.

Cornerstone investors have committed about $280 million to the China Galaxy Securities I.P.O., and $350 million to the Sinopec Engineering deal.

For Wall Street banks, being a small part of such deals can be a matter of keeping their names in front of investors and corporations, even at the expense of the bottom line. Participating in big offerings, in particular, helps banks raise their rankings among their peers, the so-called league tables used in part to evaluate bankers’ performance.

One person with direct knowledge of the two coming offerings cited previous deals in which fee income for banks went as low as $50,000. At such a level, the person said, the fee becomes meaningless, but participation still “gets you on the league tables.”

A version of this article appears in print on 05/07/2013, on page B7 of the NewYork edition with the headline: Bulking Up on Bankers for Hong Kong I.P.O.’s.